Hot Seat: Full Week Ahead Preview

It’s probably not accurate to say that Jerome Powell is “returning” to the hot seat in the week ahead because, thanks to Donald Trump, the Fed chair is in the hot seat every, single day.

Indeed, Trump criticized Powell right up until midnight Friday, tweeting, at 11:24 PM, that the Fed is the administration’s “most difficult problem”. Earlier that day, Peter Navarro and Larry Kudlow were dispatched to Bloomberg, CNN, CNBC and Fox to insist that just because the jobs market came roaring back in June from a disappointing performance in May, doesn’t mean the Fed is off the hook when it comes to Trump’s expectation that rates will be cut later this month.

Powell will deliver his semi-annual testimony to Congress on Wednesday and Thursday. As BofA notes, markets “will watch for any push back against a July cut as well as comments on global risks”. Lawmakers will likely ask Powell whether the Fed feels pressured by the Trump administration (a silly question – of course they do, any president would be hard to ignore but this president is impossible to tune out). In addition to Trump’s public comments, we also learned last week that the president called Powell on the phone on May 20. That is (at least) the third phone call between the two in 2019 in addition to the dinner Trump convened at the White House.

As ever, the contradiction between demands for rate cuts and a hot labor market is glaring. That said, recent weakness in manufacturing surveys and the lowest ISM services print in nearly two years give the Fed some plausible deniability, as does subdued inflation.

The blowout June jobs report complicates things for the Fed ahead of the July meeting, and Powell’s remarks will be watched for any indication that recent data has changed the Fed’s thinking.

The dollar rose to a two-week high following June payrolls and Treasurys sold off, a rather poignant reminder that when positioning is lopsided, the unwinds can be somewhat “sloppy”.

As if Powell’s testimony wouldn’t have been enough for markets to obsessively parse, we’ll also get the June Fed minutes. Obviously, traders will look for anything that either validates or invalidates the case for a July cut. Remember, the new dots showed eight officials see lower rates in 2019, and seven of them see 50bp worth of cuts.

“Chairman Powell’s testimony on monetary policy and the state of the economy before Congress could provide an updated view on the Fed’s thinking following the US-China G20 truce and last week’s employment data”, Barclays wrote Sunday, adding that “the message by the Fed to ‘act as appropriate to sustain the expansion’ likely will be reiterated, as lower trade uncertainty in the near term is unlikely to reduce the committee’s concerns about inflation’s persistent undershooting of target and economic weakness in manufacturing and durables, while the chairman could acknowledge that some near-term risks have receded”.

For their part, BofA argues that since the June meeting, there’s evidence of “positive news” on all three of the factors Powell cited when explaining the Fed’s ongoing pivot towards rate cuts. Those factors were: trade tensions and weaker data, softness in inflation and high uncertainty. “Indeed, even on the inflation front, the data have been better with an upward revision to 1Q core PCE inflation to 1.2% q/q saar from 1.0%, and the University of Michigan long-run inflation expectations revised up to 2.3% from 2.2%”, BofA wrote late last week, on the way to suggesting that “if Powell wants to push back against market pricing, he can make the case that the data have been better than expected”.

That said, he’ll invariably emphasize that the Fed is ready and willing to act, which means that while July might not be a “go” (so to speak), the “Powell put” is still in place. If, on the other hand, Powell wants to try and justify a forthcoming cut in front of lawmakers, potentially heading off the accusations of politicization that would invariably accompany a move at the July meeting, BofA says “he can argue that the reduction in rates is purely to boost inflation, is for ‘insurance’ purposes… and can reference the lower neutral Fed funds rate and argue that the current stance of policy is too tight”.

As far as the minutes go, Barclays notes the obvious. “Markets will look for any indication of the possibility of deeper and more front-loaded Fed rate cuts amid a potential desire to avoid testing the effective lower bound, as well as any possible changes to the balance sheet run-off calendar to avoid sending contradictory signals to markets if the committee opts to act before September”, the bank says. Of course, the account of the June meeting will be a bit stale in light of the G20.

CPI is due this week and the list of Fed speakers is laughably long (Bullard, Barkin, Bostic, Kashkari, Williams, Evans).

Stocks are parked at record highs, and will enter the new week riding a hot streak (gains in four of the past five weeks). That said, Friday’s action clearly suggests that if Powell (and/or other Fed officials) attempt to walk back expectations for a July cut, risk assets will not be happy and the action in rates could be dramatic.

In Europe, traders will be watching for the June ECB minutes. The question is: Will the minutes sound more like press conference Draghi (who, while signaling that more accommodation is certainly possible, left the bazooka in the box) or Sintra Draghi (who delivered a mini-“whatever it takes” moment on the way to infuriating Donald Trump)?

As Bloomberg notes, “the European Commission’s latest economic outlook will on Wednesday sum up the deteriorating state of the euro-area economy [and] industrial production data on Friday may also help illustrate the bloc’s predicament”.

Yields across the eurozone have tumbled of late, with Belgium joining Germany, France, Austria and the Netherlands in negative territory. 10-year German yields fell below the ECB depo rate and Italian bonds enjoyed their best week in a year (2-year Italian yields fell below zero last week).

The hunt for yield has been a boon to risk assets, but, as ever, the question is whether the economic weakness that prompted central banks to pivot so dramatically dovish will morph into an outright recession. There is little in the way of evidence to suggest the global manufacturing downturn is set to turn around soon. Eventually, the factory slump will spill over into the services sector and the labor market.

(Barclays)

Expect fireworks out of Turkey. Erdogan’s brazen move to oust the central bank governor on Saturday dealt a grievous blow to confidence. Renewed concerns about monetary policy will collide with the expected delivery of the Russian missile systems which are at the heart of the latest dispute between Ankara and Washington. It could be quite a week.

Also, it’s likely that the US will be forced to make some kind of definitive statement on Iran in the days ahead. On Sunday, the country’s top nuclear negotiator Abbas Araghchi confirmed that Tehran has breached the uranium enrichment cap set under the 2015 nuclear deal. Iran will, as indicated previously, start enriching beyond 3.67%. Although he said Iran “has more time” to consider actions at the Arak reactor, Araghchi reiterated the facility will be restored if the other parties to the deal do not meet the terms of the agreement.